The EUR/USD pair is trading in a narrow price range, reacting weakly to macroeconomic reports both from Europe and America. The focus is on geopolitics, which sets the tone for this week's trading. Despite a slight decrease in tension around Ukraine, it is still too early to talk about de-escalation. The end of the situation has not yet come, and no one can accurately say how the events will develop – whether there will be war or the parties will compromise through diplomacy. In addition, the US dollar is waiting for the minutes of the Fed's February meeting, which will be published tonight at 18:00 Universal time. In light of the latest statements from the Fed, this document may provoke increased volatility among dollar pairs.
For the time being, the EUR/USD pair is stuck in a flat. It should be noted that yesterday's block of macroeconomic statistics was controversial. For example, the German index of business sentiment from the ZEW Institute rose in February to 54 points, not reaching the expected 55-point value. However, a similar pan-European indicator showed a negative trend, dropping to 48 points against the forecasted growth of 55 points. The labor market data was disappointing. According to a preliminary estimate, the EU's employment rate grew by 0.5%, which is half the forecast level – experts expected to see this figure at around 1.0%.
Meanwhile, reports from the US came out in the "green zone". In particular, the Producer Price Index (PPI) was published yesterday, which is an early signal of changes in inflationary trends. The overall index surged to 1.0% in monthly terms against an increase of 0.5%. This is the best result since July last year. As for annual terms, the indicator rose to 9.7%. The core producer price index, excluding food and energy prices, also turned out to be in the "green zone" – both on an annualized and monthly basis. The Empire Manufacturing index, which is based on a survey of manufacturers of the "district" of the FRB of New York, also got out of the negative area. In January, this indicator was below zero for the first time in a long time, but it rose to the 3-point mark in February.
EUR/USD traders reflexively reacted to the above reports. The price declined by almost 40 points, reporting to the bottom of 1.13 following the release of the producer price index. However, the pair returned to the middle of 1.13 after a few hours.
All this suggests that the focus now is geopolitics. The "Washington-Paris-Berlin-Kiev-Moscow" negotiation line has been working for several previous weeks, but the parties have not yet reached any clear fundamental results. According to the results of yesterday, the situation remained unresolved, and the tension around Ukraine has reached unprecedented proportions in many years. German Chancellor Olaf Scholz said that Ukrainian President Volodymyr Zelensky "firmly promised" to consider draft laws on the status of Donbas and amendments to the Constitution of Ukraine.
In other words, the geopolitical tension that could turn into a military conflict is not over yet. The most negative scenarios that were voiced in the Western (primarily American and British) media have not yet been implemented, but it is categorically impossible to talk about de-escalation today. Further aggravation of the situation will be in favor of the US currency, which will be in high demand again as a defensive asset.
On another note, EUR/USD traders are waiting for today's publication of the minutes of the last Fed meeting. This document will allow us to assess the overall mood of the Fed, in the context of the latest inflationary data. It can be recalled that some representatives of the regulator (in particular, Bullard) have recently called on their colleagues to implement the most hawkish scenario. For example, Bullard said that the rate should be raised immediately by 50 basis points in March, and by another 50 points on July 1. However, not all of his colleagues support this. For example, Esther George, Mary Daly, and Thomas Barkin questioned whether such an aggressive pace of monetary tightening was safe and warranted. Today, the minutes will allow us to understand how strong the hawkish sentiment in the camp of the Fed is.
Therefore, the situation for the pair is uncertain. In my opinion, the downward trend is still a priority in the medium term (and even more so in the long term), primarily due to the divergence of the position of the ECB and the Fed. However, if we talk about the immediate prospects, then an upward correction is very likely. The "ceiling" of the correction is the level of 1.1400 (the upper border of the Kumo cloud on the D1 timeframe). If the corrective momentum begins to fade in this price area, it is advisable to consider short positions with the first target at 1.1330 (the middle line of the Bollinger Bands indicator on the same timeframe).
